March 25, 2019

Economix Blog: Bruce Bartlett: A Conservative Case for the Welfare State


Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of “The Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take.”

At the root of much of the dispute between Democrats and Republicans over the so-called fiscal cliff is a deep disagreement over the welfare state. Republicans continue to fight a long-running war against Social Security, Medicare, Medicaid and many other social-welfare programs that most Americans support overwhelmingly and oppose cutting.

Today’s Economist

Perspectives from expert contributors.

Republicans in Congress opposed the New Deal and the Great Society, but Republican presidents from Dwight D. Eisenhower through George H.W. Bush accepted the legitimacy of the welfare state and sought to manage it properly and fund it adequately. When Republicans regained control of Congress in 1994 they nevertheless sought to repeal the New Deal and Great Society programs they had always opposed.

Energized by their success in abolishing the principal federal welfare program, Aid to Families With Dependent Children, in 1996, Republicans tried to abolish Social Security as well, through partial privatization during the George W. Bush administration, and they more recently have attempted to change Medicaid into a block grant program with funds going to the states and to turn Medicare into a voucher program.

In the 40th anniversary edition of his book, “Capitalism and Freedom,” Milton Friedman advised conservatives to use crises as opportunities to advance their agenda. “Only a crisis – actual or perceived – produces real change,” he contended.

Thus Republicans are now using the fiscal impasse to try to raise the age for Medicare and reduce Social Security benefits by changing the index used to adjust them for inflation. They know that such programs will be easier to abolish in the future if the number of people who qualify can be reduced and benefits are cut so that privatization becomes more attractive.

This is foolish and reactionary. Moreover, there are sound reasons why a conservative would support a welfare state. Historically, it has been conservatives like the 19th century chancellor of Germany, Otto von Bismarck, who established the welfare state in Europe. They did so because masses of poor people create social instability and become breeding grounds for radical movements.

In postwar Europe, conservative parties were the principal supporters of welfare-state policies in order to counter efforts by socialists and communists to abolish capitalism altogether. The welfare state was devised to shave off the rough edges of capitalism and make it sustainable. Indeed, the conservative icon Winston Churchill was among the founders of the British welfare state.

American conservatives, being far more libertarian than their continental counterparts, reject the welfare state for both moral and efficiency reasons. It creates unhappiness, they believe, and inevitably becomes bloated, undermining incentives and economic growth.

One problem with this conservative view is its lack of an empirical foundation. Research by Peter H. Lindert of the University of California, Davis, shows clearly that the welfare state is not incompatible with growth while providing a superior quality of life to many of those left to sink or swim in America.

In a new paper for the New America Foundation, Professor Lindert summarizes his findings. He points out that there are huge efficiencies in providing pensions and health care publicly rather than privately. A main reason is that in a properly run welfare state, benefits are nearly universal, which eliminates vast amounts of administrative overhead necessary to decide who is entitled to benefits and who isn’t, as is the case in America, and eliminates the disincentives to work resulting from benefit phase-outs.

A 2003 study in the New England Journal of Medicine found that Canada’s single-payer health system had less than a third of the per-capita administrative cost of the United States system, with its many private insurance companies and overlapping government programs – $307 per year in Canada versus $1,059 in the United States. And although American conservatives are fond of pointing to cases where Canadians come to the United States for treatment, a 2009 Harris poll found that 82 percent of Canadians favor their health system over the American one.

Americans believe that their health system is the best in the world, but in fact it is not. According to the Commonwealth Fund, many countries achieve superior health quality at much lower cost than paid by Americans. A detailed study of the United States and England in the American Journal of Epidemiology in 2011 found that over a lifetime the English have better health than Americans at a fraction of the cost.

The one area where the United States tops all other countries in terms of health is cost. According to the Organization for Economic Cooperation and Development, the United States spent more than any other country – 17.4 percent of gross domestic product on health in 2009, 8.3 percent through government programs such as Medicare and 9.1 percent privately. By contrast, Britain spent only 9.8 percent of G.D.P. on health, 8.2 percent publicly and 1.6 privately.

Thus, for no more than the United States already spends through government, we could have a national health-insurance system equal to that in Britain. The 7.6 percent of G.D.P. difference between American and British total health spending is about equal to the revenue raised by the Social Security tax. So, in effect, having a single-payer health system like Britain’s could theoretically give Americans 7.6 percent of G.D.P. to spend on something else – equivalent to abolishing the payroll tax.

This is a powerful conservative argument for national health insurance. There are many other ways, as well, in which what the conservatives call bloated European welfare states are actually very efficient. This fact is disguised in commonly cited data for spending as a share of G.D.P. because so much social spending in the United States takes the form of tax expenditures, which are de facto spending.

The O.E.C.D. recently calculated net social spending in its member countries, taking account of tax expenditures and outlays that individuals are forced to make to compensate for the lack of commonly available public programs. On a gross basis, the United States ranks 23rd of 27 countries in the study, with social spending at 17.4 percent of G.D.P. versus an average of 22.4 percent. But based on adjusted data that accounts for tax expenditures, United States social spending rises to 27.5 percent of G.D.P., putting us in fifth place, well above the average of 22.2 percent.

American conservatives routinely assert that the people of Europe live in virtual destitution because of their swollen welfare states. But according to a commonly accepted index of life satisfaction, many heavily taxed European countries rank well above the United States, including the Netherlands (where total taxes were 38.7 percent of G.D.P. in 2010 compared with 24.8 percent in the United States), Norway (42.9 percent), Sweden (45.5 percent) and Denmark (47.6 percent).

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Economix Blog: Pressuring the Fed Can Backfire

In a statement this afternoon, the Federal Reserve announced that it was engaging in more stimulus, by extending the average maturity of the securities on its balance sheet. This was basically what markets had expected, even though the Republican Congressional leadership wrote a widely reported letter to Ben S. Bernanke, the Fed chairman, urging him not to engage in any more easing.

Scratch that: “Even though” may not convey the right causal relationship between those two events. Some may argue that the letter could have encouraged the Fed to issue another round of monetary stimulus.



Dollars to doughnuts.

The Federal Reserve is officially an independent body, and its autonomy is intended to shield it from short-term political interests that may be popular now but bad for the economy later.

Truth be told, though, efforts to put political pressure on the Fed go back much farther than this week. There have been many letters sent by Congressional committees and individual senators and members of Congress in just the last few years telling Fed officials to do or not do something or other, as well as in previous decades.

The letters linked above were generally for less significant decisions, of course. But in Congressional hearings and the like, legislators have attacked interest-rate policy and other important Fed actions, like quantitative easing, as well. Such confrontations, watched by a handful of people on C-SPAN, generally seem to be intended more as grandstanding than efforts that may actually change Fed policy.

When officials from the legislative and executive branches actually expect to influence Fed policy, they’re more likely to voice their arguments out of the public’s view, and in private meetings.

Why? As Bruce Bartlett, a former Treasury official from the George H.W. Bush White House and a contributor to Economix, explained by e-mail:

Historically, one of the main things that has held back politicians from publicly criticizing the Fed is that it can easily backfire and encourage it to do the opposite of what they want it to do. Certainly there have been many times in the ’80s and ’90s when administrations wanted an easier monetary policy. But they knew that the Fed jealously guards its independence and cannot allow itself to be seen as caving to administration pressure. Therefore, administration pressure to ease would force the Fed to remain tight lest it appear that it was caving to pressure. For this reason, administrations quickly learned that the best way to influence the Fed is through back channels. Historically, this has been done through the Treasury. I don’t know if it is still true, but for many years the Treasury secretary and the Fed chairman had breakfast every week, privately, no staff. This is the forum for the administration to tell the Fed what it should be doing.

I asked Mr. Bartlett whether he knew of specific cases where the Fed appeared to take an action precisely because there was pressure to do the opposite. He replied that he suspected such an incident occurred with Mr. Bernanke’s predecessor, Alan Greenspan:

When I worked at Treasury during the Bush 41 years, I had the definite sense that [Treasury Secretary Nicholas F.] Brady’s public criticism of Greenspan caused Greenspan to resist easing, which he might otherwise have done given economic conditions. Of course, I can’t prove it.

In today’s case, I doubt that the Fed decided to ease because of the Republicans’ letter; as I mentioned above, markets seem to think this was a sure bet already.

But because markets thought more easing was a sure bet, not easing after receiving this letter definitely would have made the Fed look as if it were caving to political pressure. In that sense, the Republicans’ attempt at exerting pressure seemed doomed to fail.

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Economix Blog: Bruce Bartlett: The Rich Can Afford to Pay More Taxes


Bruce Bartlett held senior policy roles in the administrations of Ronald Reagan and George H.W. Bush and served on the staffs of Representatives Jack Kemp and Ron Paul.

Warren Buffett’s commentary in The New York Times on Aug. 15 has opened a new front in the continuing debate on whether taxes should be raised to reduce projected budget deficits.

Today’s Economist

Perspectives from expert contributors.

Mr. Buffett asserted that the well-to-do could easily shoulder a higher burden. Specifically, he proposed an increase in the current 35 percent top rate for those making more than $1 million and a further increase on those making more than $10 million. He also proposed taxing dividends and capital gains as ordinary income (currently, they are taxed at a maximum rate of 15 percent).

Conservative groups such as the Tax Foundation pooh-pooh the idea of raising tax rates on the rich, asserting that there isn’t enough money available to bother with.

On Friday, however, the respected Tax Policy Center published estimates showing that the potential revenue would have a significant impact on projected deficits. It looked at several options, including a 50 percent top rate on incomes over $1 million and changes to the taxation of dividends and capital gains.

Tax Policy Center, Aug. 19, 2011

As one can see, the revenue potential depends critically on what baseline is assumed. That is because the top tax rate is already scheduled to rise to 39.6 percent on incomes over $380,000 in 2013. Moreover, dividends on corporate stock would go back to being taxed as ordinary income. And capital gains would go back to being taxed at a maximum rate of 20 percent.

The larger question is how much the well-to-do should pay. According to the Internal Revenue Service, in 2008, those in the top 1 percent of the income distribution, with incomes over $380,000, had an effective tax rate of 23.3 percent. In 1986, a year when the real gross domestic product grew a healthy 3.5 percent, their effective tax rate was 33.1 percent. It has been much lower every year since.

If this group were still paying 33.1 percent, federal revenue would have been more than $166 billion higher in 2008 alone. That would be enough to reduce the budget deficit by about 10 percent this year. If the top 1 percent of taxpayers had continued to pay the same effective tax rate they paid in 1986 every year from 1987 to 2008, the federal debt today would be $1.7 trillion lower.

Internal Revenue Service

Of course, these are not hard numbers. If the effective tax rate had stayed at 33.1 percent on the top 1 percent of taxpayers all these years, their behavior would undoubtedly have changed.

And it probably would have been impractical to maintain a higher rate on just the top 1 percent of taxpayers without having had higher rates on many of those below that percentile. But it does show the order of magnitude of how much revenue has been sacrificed from tax cuts on those with very high incomes.

Some will argue that those tax cuts bought higher economic growth, but that is very doubtful. Growth was stronger in the 1990s when the relative revenue loss was small and was dismal during the George W. Bush administration, when two-thirds of the aggregate revenue loss occurred.

It is not class warfare to suggest that the richest 1 percent of people in society pay one-third of their income to the federal government, as they did under Ronald Reagan. Keep in mind that dividends were taxable as ordinary income every year of his administration, and in the Tax Reform Act of 1986 he supported taxing capital gains as ordinary income as well.

Higher effective tax rates on the rich could even be achieved without raising the top tax rate bracket to 50 percent, as it was under President Reagan. There are many tax preferences that largely benefit the well-to-do that could be scaled back to avoid raising marginal rates.

The important thing is for people to accept that we can no longer afford such low effective tax rates on those with the greatest capacity to pay at a time when total revenues as a percentage of G.D.P. are at their lowest level in 60 years and we are facing a debt crisis. The issue is not whether the rich should pay more, but how best to accomplish it.

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Economix: Doing Away With the Debt Ceiling


Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul.

Almost 10 years ago, I testified before the Senate Finance Committee that the debt limit should be abolished. Among the others who testified that day, including Treasury Secretary Paul O’Neill, no one supported my position.

Today’s Economist

Perspectives from expert contributors.

What we have seen, currently and in the years since that hearing, is that for any politician to deny the validity of the debt limit is effectively to support unlimited debt, something no member of either party can afford to be accused of.

The negotiations leading up to Sunday night’s announcement that President Obama and Congressional leaders of both parties had reached a deal to cut trillions of dollars in federal spending over the next decade makes the case against the debt limit that much stronger. We now know that it is a powerful mechanism for political extortion.

Unless the party holding the White House has a comfortable majority in the House of Representatives and at least 60 seats in the Senate, raising the debt limit is going to remain a means by which the minority party can impose its demands on the majority.

Even if the Treasury avoids default on government debt this week, we will inevitably have to go through the same political drama the next time the debt limit runs out and every time thereafter. And sooner or later the shoe will be on the other foot, as Democrats hold the debt limit hostage against a Republican president.

Unfortunately, the option of just letting the debt limit expire is not available. It is permanent law and can be abolished only by repeal or by a ruling by the Supreme Court that it is unconstitutional. Note that the law does not impose a deadline at which the debt limit runs out; rather, the limit is a dollar figure that must be amended when the gross federal debt reaches it. The date when the limit is breached is a function of Treasury’s cash flow and expenses.

The Constitution grants Congress the power to “borrow money on the credit of the United States.” Before World War I, it had to authorize each and every Treasury bond issue and its precise terms. During an era when the federal budget was usually balanced, this was not a huge problem.

But with the unprecedented borrowing needs of the First World War, Congress ceded to Treasury the power to decide when and under what terms it would borrow, subject only to an overall dollar limitation.

While politicians and the general public believe that the debt limit is an important constraint on national indebtedness, not one iota of evidence supports this belief. Economists have been making this point repeatedly for more than 50 years. In 1959, Marshall Robinson of the Brookings Institution came to this conclusion in a book-length study of the debt limit:

On the record, the debt ceiling experiment has failed. Although at times the ceiling has clamped down on government spending, it has not prevented the long-term growth of debt. Indeed, there is some evidence that reactions to its short-run pressure may ultimately contribute to the growth of debt.

Before 1974, it was plausible to argue that there was some virtue in having a debt limit because it forced Congress to acknowledge the consequences of deficit spending from time to time. But that year, it enacted the Congressional Budget and Impoundment Control Act, which requires Congress to enact a budget resolution annually that specifies an appropriate level for the deficit and the debt.

Consequently, a separate vote on the debt limit is at best superfluous. As the General Accounting Office put it in a 1979 report:

The implementation of the Congressional Budget and Impoundment Control Act of 1974 has brought into question the need for the Congress to consider the debt ceiling separately from the budget process.

This fact led Alan Greenspan, then chairman of the Federal Reserve, to recommend abolition of the debt limit in 2003 testimony:

In the Congress’s review of the mechanisms governing the budget process, you may want to reconsider whether the statutory limit on the public debt is a useful device. As a matter of arithmetic, the debt ceiling is either redundant or inconsistent with the paths of revenues and outlays you specify when you legislate a budget.

Mr. Greenspan’s point is crucial: the decision to run a deficit and increase national indebtedness is made by Congress when it votes to cut taxes, create entitlement programs and enact appropriations that will necessarily cause spending to be higher than revenues – not when it raises the debt limit.

As the Congressional Budget Office put it in a 2010 report:

By itself, setting a limit on the debt is an ineffective means of controlling deficits because the decisions that necessitate borrowing are made through other legislative actions. By the time an increase in the debt ceiling comes up for approval, it is too late to avoid paying the government’s pending bills without incurring serious negative consequences.

It is nothing but grandstanding for members of both parties to vote routinely for legislation that they know will create deficits and then profess shock and horror that the debt limit must be increased as a consequence. Even Captain Renault in “Casablanca” would be offended by such hypocrisy.

Historically, raising the debt limit was mere political theater giving cover to Congressional double-talkers because everyone knew that it would be increased. But that is no longer a foregone conclusion now that a significant number of Republicans in both the House and Senate believe that default on the debt is preferable to deficit spending.

Indeed, many say publicly that they will never support a debt limit increase under any circumstances and will even filibuster one, asserting that default would actually be a good thing because the budget would be balanced overnight.

For these reasons, the debt limit must be abolished. While that is extremely unlikely at this time, it is nevertheless necessary. As the computer eventually learned in the movie “War Games,” the only way to avoid disaster in this sort of game is not to play.

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Economix: Who Doesn’t Pay Federal Income Taxes (Legally)

Today's Economist

Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul.

Conservatives are fond of railing against those who are able to legally avoid paying federal income taxes. The Wall Street Journal routinely refers to them as “lucky duckies.”

Senator Orrin Hatch of Utah, the ranking Republican on the Senate Finance Committee, recently asserted that it was appalling that about half of all those who file federal income tax returns pay nothing and said this was proof that income taxes must not be raised to reduce the deficit, because the burden would necessarily fall on just half of households.

But the growth of the non-income-taxpaying population is largely a result of Republican tax policies. The earned-income tax credit is the main reason those with low incomes are largely exempted from federal income taxes. Originated by Gerald Ford, it was expanded by both Ronald Reagan and George H.W. Bush as a better way to help the working poor than raising the minimum wage, which they believed would increase unemployment.

According to the Tax Foundation, in 1974, before the earned-income tax credit was instituted, 19.2 percent of tax filers had no federal income tax liability. This rose to 25.2 percent in 1975 when the credit took effect.

During the 1990s, about 24 percent of filers had no income tax liability, but this number took a big jump during the George W. Bush administration as Republicans added a large child credit to the tax code. The percentage of filers with no income tax liability rose to 36.3 percent in 2008, from 25.2 percent in 2000.

According to new data from the Tax Policy Center, this year 46.4 percent of tax filers will have no federal income tax liability. The following table presents the data.

Tax Policy Center

As one can see, almost all of those in the bottom income quintile — those with incomes below $16,812 — will have no federal income tax liability this year. About three-fifths of those in the second income quintile will also have no liability, 30 percent of those in the middle quintile, and 7.3 percent of those in the fourth quintile. It is not only the poor who are exempt from federal income taxation; substantial numbers of households in the middle class are also exempted.

Surprisingly, a not insignificant number of those who are clearly well off are also among the “lucky duckies.” There are 78,000 tax filers with incomes of $211,000 to $533,000 who will pay no federal income taxes this year. Even more amazingly, there are 24,000 households with incomes of $533,000 to $2.2 million with zero income tax liability, and 3,000 tax filers with incomes above $2.2 million with the same federal income tax liability as most of those with incomes barely above the poverty level.

It is not because of the earned-income tax credit or the child credit that the ultra-wealthy are paying no federal income taxes.

One reason, undoubtedly, is that capital gains are a huge percentage of their income and they may have losses from previous years to offset any realized gains this year. Perhaps some chose to invest all their wealth in tax-free municipal bonds.

And, of course, a large industry of tax lawyers make their living advising the wealthy on how to minimize their tax liability by exploiting existing provisions of the tax law.

These data look only at legal tax avoidance; they do not account for illegal tax evasion, which is quite extensive, especially at the top and the bottom of the income distribution. Those in the middle class who have only wage income are much more limited in their opportunities for evasion.

The phenomenon of large numbers of non-federal income tax payers has long been a subject of debate. Those on the left emphasize that other taxes, such as payroll taxes, are paid by those with no income tax liability, a point I discussed last week. Those on the right often complain that it is fundamentally undemocratic for such a large percentage of the population to pay nothing to offset the federal government’s general operations. After all, everyone benefits from national military spending and other federal programs.

Perhaps the right and left can at least agree that it is unseemly for those in the top 1 percent of income distribution, with incomes at least 10 times the median income, to pay no federal income taxes. It’s not socialism to ask them to pay something.

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